KB-Toys sold merchandise to a Japanese customer. The sale was for Yen 200,000,000, with payment due...

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KB-Toys sold merchandise to a Japanese customer. The sale was for Yen 200,000,000, with payment due in three months. The following information is available: Exchange rates: Spot rate: Yen 118/$ 3-month forward: Yen 116/$ Money rates (% per annum): US investment rate: 19.2% Japan investment rate: 0.4% KB toys can borrow in Yen at 1% above the Japanese investment rate. KB Toys can borrow in $ at 2% above the US investment rate. The cost of capital of KB Toys is 16%. 1 Do the following: a.) Set up a forward hedge b.) Set up a money market hedge c.) What is the break-even reinvestment rate when comparing the forward and money market alternatives? KB-Toys sold merchandise to a Japanese customer. The sale was for Yen 200,000,000, with payment due in three months. The following information is available: Exchange rates: Spot rate: Yen 118/$ 3-month forward: Yen 116/$ Money rates (% per annum): US investment rate: 19.2% Japan investment rate: 0.4% KB toys can borrow in Yen at 1% above the Japanese investment rate. KB Toys can borrow in $ at 2% above the US investment rate. The cost of capital of KB Toys is 16%. 1 Do the following: a.) Set up a forward hedge b.) Set up a money market hedge c.) What is the break-even reinvestment rate when comparing the forward and money market alternatives?

Answer rating: 100% (QA)

a Set up a forward hedge To set up a forward hedge KB Toys will enter into a forward contract to sell Yen and receive US dollars at the forward rate T... View the full answer